Children are being asked to make one of the largest purchase decisions of their life at the age of 17, paying for a college education. The result, the average graduate has more than $37,000 in student loan debt.
Parents understand that investing in an education usually pays off, however that payoff is also tied to the price they pay. Following a few steps can help ensure that you don’t overpay for an education, protect your assets for retirement and help your children graduate with a minimal amount of student loans.
Assets and Income
Take an inventory of what assets and income you can earmark towards education without jeopardizing your own goals, such as retirement. This usually starts with college savings plans such as 529’s, UTMA accounts and cash accounts. Next, determine a monthly cash flow amount that can be earmarked towards college without negatively impacting your own ability to save for retirement. This should also include tax savings, such as the American Opportunity Tax Credit, which can potentially save you up to $10,000 over four years.
Maximum Student Loan Amount
Student loans should play a small part in funding an education. Nearly everyone will qualify for a Stafford Loan as they do not require a co-signer or underwriting. The current interest rate for undergraduates is 5.05% and up to $27,000 can be borrowed for the first four years. Parents will need to file the Free Application for Federal Student Aid (FAFSA) to qualify, and all families should file the FAFSA, regardless of their financial situation. Other loans such as Plus loans and private loans should be avoided when possible due to the higher upfront fees and interest rates.
The resulting principal and interest payments after graduation should be accounted for when planning. A good rule of thumb is to not take out more in student loans than the first-year salary out of college. PayScale is one resource that can help with this. You want to be sure that future loan payments will not impact your child’s ability to save for retirement, buy a home or fund other goals.
Develop your College List
Now that you have a budget you can begin creating your college list. The criteria for choosing colleges should be based on personal, academics and financial factors. From a personal standpoint you need to find schools where your child will fit in. This includes such factors as class size, proximity to home, majors and location of the school. The goal is to have your child graduate on time and limit the overall cost of their education. If they can’t narrow their options down then it might make sense to take a gap year or attend a community college.
Choose colleges where your child ranks in the top 25% of incoming freshman from an academic standpoint. This will not only increase their chances of acceptance but also optimize their chances of received merit-based financial aid. Merit aid is based on specific accomplishments and has nothing to do with your assets and income.
You will also want to know what aid applications each college uses and if you will qualify for any need-based financial aid. Need-based aid is calculated by taking the cost of attendance minus your expected family contribution, or EFC. Your EFC is based on the income and assets of your entire family. Every college has a net price calculator on their website which can help answer these questions. Be careful when the net price exceeds your budget. Using home equity or assets earmarked for retirement to pay the difference should be avoided when possible.
You might not be able to control the cost of education, but you can sure plan for it. Start savings as early as possible, develop a “late-stage” planning strategy and coordinate with outside professionals as needed. If your current financial advisor isn’t providing comprehensive guidance in the areas of college selection and financial aid, find someone who can.